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In some regions, private TVEs actually declined in the 1990s relative to the size of the collective TVEs.
Because private TVEs expanded in those provinces with a large TVE sector, national data show an increase in private TVEs.
The expansion of the private TVEs in these large TVE provinces masks the retrogressions in the smaller TVE provinces in the national data.
Provinces such as Jiangsu and Zhejiang, the two coastal, richer regions in China, had favorable endowment factors – such as access to FDI, trade, and an urban economy – to fall back on. It was the poor regions of China that most needed indigenous, bottom-up entrepreneurship because they lacked alternative means of economic development.
My contention is that the latter occurred on a large scale in the 1990s – that the local governments in the poor regions, instead of facilitating a natural, organic process of private-sector development, poured financial and other resources into the collective sector.
the TVEs in those provinces lost market shares. Guizhou, Henan, Hebei, Heilongjiang, and Guangxi, the poor provinces that experienced a contraction of the share of private TVEs between 1987 and 1997, also experienced a contraction in their share of TVE output – inclusive of both collective and private TVEs – in the national total.
If the private TVEs lagged in some of the poorest provinces, why did they grow in the richer provinces?
During the 1990s, the Chinese state adopted a policy platform officially known as “grasping the big and letting go of the small.” “Grasping the big” means policy support for the large incumbent firms and “letting go of the small” means privatization of small firms.
The most valuable and the largest assets in the rich provinces resided in the traditional state sector, rather than in the TVEs. Thus, the logical approach in those regions was to restructure the SOEs, often by massive fresh investments and/or by forming alliances with FDI. The TVEs in these regions were small relative to the incumbent SOEs and were thus relegated to the privatization part of the policy program (i.e., “letting go of the small”).
The poor regions had entirely different endowment conditions. They had a relatively under-developed state sector (and this is the reason why the private sector was allowed to develop there in the first place). They also had a paucity of FDI supply, which precluded this particular restructuring option. Their incumbent large firms comprised collective TVEs, which were then targeted for support under the policy of “grasping the big and letting go of the small.”
In the 1980s, rural China experimented with substantial financial liberalization,
In the 1990s, numerous rural entrepreneurs who had been forced to tap into or organize underground financing because of the massive inadequacies of China's banking system were arrested.
The rapid growth of rural fixed-asset investments in the 1980s illustrates a phenomenon virtually unknown in the West – the supply of bank capital to the private sector in the 1980s was plentiful.
In the 1990s, rather than being complementary, the formal and informal sources of finance became substitutes for one another. The authorities oriented the banking system away from the private sector; thus, the credit constraints on the private entrepreneurs drove them to rely more heavily on informal finance.
Thus, one finds informal finance wherever private entrepreneurship was present and, as I pointed out in the last chapter, private entrepreneurship thrived in the poor, rural, interior provinces. It is thus not surprising to find informal finance in those regions as well, not just in coastal provinces.
The best example of the market-based view of the Chinese reformers in the 1980s is the financial innovation called rural cooperative foundations. The background to the RCFs was the large-scale privatization of collective assets in the early 1980s. Although rural China privatized the control rights of collective land, some of the assets, such as plow animals or heavy-duty equipment, either were too expensive to be acquired by individual households or were indivisible assets – a donkey cannot be divided in two. So these assets still remained on the books of the villages, but they became illiquid
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The substantial financial repression of the private sector that occurred after 1993 was not motivated by political ideology but rather by technocratic ideology. The private sector, much of it rural, small-scale, low-tech, and hailing from the poorer parts of China, was considered not worthy of the country's precious financial capital.
The financing repression of the private sector took two forms. One was a change in the lending priorities of Chinese banks. Banks were now instructed to support agriculture rather than to support rural entrepreneurs transitioning out of agriculture. This is an industrial policy mentality par excellence. Because of the view that agriculture is strategic – ensuring cheap agricultural supplies to industry and to cities – and because of distrust of the price mechanism, the idea is that the state had to use policy levers to affect the relative returns between farm and non-farm activities.
The restriction of RCCs to agricultural lending amounted to effective credit constraints on rural private entrepreneurs, the vast majority of whom started their businesses to get out of agriculture. This represented a fundamental shift from the focus of the RCCs in the 1980s, which was to facilitate the transition of rural residents out of agriculture.
For this reason, in the 1980s, the reformers explicitly discouraged the rotations of top managers of the RCCs. The practice was resurrected in 1992.
Rural finance became increasingly centralized in the 1990s.
In 1985, there were more than 400,000 RCCs in the country. This number was to decline sharply in the 1990s. In 1990, there were 384,320 RCCs and 286,389 in 1992. By 2003, only 91,393 RCC branches remained.
The primary consideration was that informal finance was a source of competition with the state-owned financial institutions and that it drew resources away from the industrial policy programs of the state. The motivation was not the stability of the banking system.
Li Changping, a rural official in Hubei province, in his now famous 2000 open letter to then-premier Zhu Rongji – refers to the three rural crises: the crisis of agriculture, the crisis of village governance, and the crisis of the peasantry.
In the immediate aftermath of the rural reforms in the 1980s, there was a quick and initial decline in the power of the CCP. Rural self-governance at the village level began to emerge. In the 1990s, however, there was an explicit and substantial effort to “re-build” the CCP in rural China. Any progress that had been made in the direction of improving self-governance in rural China was eroded by the fiscal and administrative recentralization.
In the 1990s, the central government began to incorporate and then to increase the weight assigned to strengthening the local Party apparatus in its performance evaluations of subordinate officials. A major decision by the Politburo in 1994 laid out various measures to reclaim Party control of the countryside.
Many Chinese villages are populated by members of the same clan. This is why these villages are known as natural villages. They have a cohesive and tight culture and kinship networks in a way that distinguishes them from large, artificial, and far more permeable townships.20 Centralizing the operating management of villages in the hands of townships nullified both the legal and the built-in autonomy of Chinese villages.
The political reforms in the 1980s were designed to enhance the accountability of the government by creating some checks and balances over the power of the CCP and by fostering intraparty democracy.
According to the same study, although individual shareholding constituted 30 percent of the outstanding shares, on average individual shareholders occupied less than 0.3 percent of the seats on the boards of 154 companies, whereas on average the state was over-represented on the boards. On average, the state retained 50 percent of the seats even though its equity shares amounted to 30 percent.
The repression of the broad-based, small-scale private entrepreneurship would also depress income growth, thus limiting domestic consumption as a driver of growth. To maintain the same pace of GDP growth would require increasing the investment levels. This hypothesis dovetails with the fact that China launched huge infrastructural and urbanization projects since the mid-1990s. A large portion of those investments occurred within the state sector.
One is that GDP growth in the 1990s increasingly was disconnected from the welfare of Chinese citizens. The ratio of household income per capita – gathered through surveys – relative to GDP per capita declined continuously during the decade.
The story of the 1990s is one of substantial urban biases, huge investments in state-allied businesses, courting of FDI by restricting indigenous capitalists, and subsidizing the cosmetically impressive urban boom by taxing the poorest segments of the population.
Much of the hype about Shanghai is heavily based on impressions (and on GDP data). The “Shanghai miracle” is assumed but not demonstrated. The “tyranny of numbers,” in the words of Alwyn Young (1995), has led me to question the very foundation of this miracle. As in the rest of this book, I rely heavily on micro data for analysis. Three sources of data have been especially important in uncovering the economic dynamics of Shanghai: the well-designed rural and urban household surveys by the NBS; the series of private-sector surveys on larger and more established private enterprises; and a
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A huge portion of Shanghai's GDP accrues not to Shanghai's households as personal income but rather to the government in the form of taxes and to corporations in the form of profits. Corporations in Shanghai are either heavily controlled by the government or their control rights are shared with foreign companies.
As recently as 2005, rural Shanghainese, who still accounted for a sizable share of the workforce,2 had about the same income level as they did in 1989 relative to the rural income level of the country as a whole. The income position of urban Shanghainese, compared to the urban income of China as a whole, improved only marginally since the early 1990s.
Whereas Shanghai households enjoy the highest wage level in the country, they earn very little money from their asset ownership,
Despite a rich history of business creation and risk-taking, entrepreneurship is almost completely missing in Shanghai today.
The “missing-entrepreneurship” phenomenon is extreme. In terms of small-scale household businesses, Shanghai ranks at the bottom of the country. In terms of larger, established private-sector businesses, Shanghai is under-developed relative to some of China's poorest agricultural provinces.
The Shanghai model can be characterized as having three key elements. The first is heavy-handed intervention by the state in most micro affairs of the economy. The second is that the city has the most blatant anti-rural bias in its policy orientation in the country. (And, according to the line of reasoning developed in this book, an anti-rural policy orientation is strongly anti-market.) The third is a biased liberalization that privileges foreign capitalists – namely, FDI – and restricts and discriminates against indigenous capitalism.
the city, taking advantage of its privileged political position, was heavily subsidized by the rest of the country.
China – and Shanghai in particular – has been the Bank's best student and its most admired teacher in FDI liberalization and globalization.
The excellent GDP performance and the massive FDI inflows must have improved the welfare of the average Shanghai residents enormously.
There are two ways to disaggregate GDP data. One is the expenditure approach, under which GDP is disaggregated into consumption, investment, government spending, and net exports. The expenditure approach is the most common method by which GDP data are reported for China and for other countries. The alternative approach is the income approach, under which GDP is divided into the following components: (1) labor income (i.e., wages and benefits), (2) capital income (i.e., business profits, interest, and rent), (3) depreciation, and (4) taxes (i.e., income to the government).
The other three components of GDP represent income accruals to the three main players in an economy: labor, capital owners, and government. This decomposition of GDP immediately illustrates the fallacy of the common assumption: That GDP per capita was 55,037 yuan in 2004 does not at all mean that an average Shanghainese earned 55,037 yuan. The 55,037 yuan was shared among labor, capital owners, and government. Importantly, it matters how the GDP is distributed among them.
In 2002, SOE and government-controlled firms in Shanghai accounted for 39.4 percent of the industrial output value, compared with only 13.6 percent in Zhejiang (NBS 2003b, p. 461).
Shanghai is rich but an average Shanghainese is not. A huge share of the economic gains go to the government and the state-controlled businesses.
One hypothesis is that a state-controlled economy can grow without improving the economic well-being of its average residents.
The welfare implications of the state-centered, interventionist Shanghai model and of the entrepreneurial Zhejiang model cannot be more clear.
The property income declined in absolute terms; an average Shanghai resident was worse off in 2001 than she was in 1992 as measured by her property income. In 1992, the average property income was 44 yuan, compared with 39 yuan in 2001. All of this took place when GDP in Shanghai was growing at a double-digit annual rate.
Many observers believe that Shanghai experienced a Renaissance in the 1990s. The truth is that for Shanghai's average households, the massive growth brought about very little in wealth creation.
